How The Employee Retention Credit Can Help

In the most recent update, the Department of Treasury and the Internal Revenue Service have provided a “safe harbor”, allowing employers to leave out certain items from their gross receipts only for the purpose of determining eligibility for the Employee Retention Credit. What is the Employee Retention Credit and how can it help your practice?

So What Is the Employee Retention Credit?

Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Employee Retention Credit (ERC) was set up in 2020, serving as a tax credit for small businesses to encourage keeping employees on the payroll. In January 2021, this credit was extended to June 2021, and after it was extended once again to end before January 2022.

For 2020, the ERC provided a tax credit against certain payroll taxes between March 12 to December 31. As for the first two quarters of 2021, it is a quarterly tax credit against the employer’s share of certain payroll taxes. Eligible entities can receive 70% of the of the first $10 000 in wages for each employee, for each quarter of 2021. This means that the credit can be up to $14 000 from January 1 through to June 30, 2021, for each employee. The credit was later extended to cover eligible employers who paid qualified wages between the last 2 quarters of 2021 as well, making the total businesses could receive $28 000 for the 2021 year.

In 2020, you could have received up to $5000 per employee when the tax credit was 50% of the wages to a max of $10 000.

In total for the two years, $33 000 could be received by an eligible business to help those who have been impacted by the pandemic.

Two exemptions of organizations include state and local governments and their instrumentalities and small businesses who take small business loans.

Am I Eligible?

Eligibility criteria also changed from 2020 to 2021.

In 2020, to be eligible, there were the criteria:

Business was fully or partially shut down due to a government order in 2020, or the business’ growth profits for any quarter declined by 50% or more compared with the same quarter in 2019
Employees were retained or kept on the payroll

In 2021, the criteria changed to:

At least partly shut down due to a government order or the revenues for any quarter declined more than 20% compared with the same quarter in 2019 or the immediately preceding quarter in 2020 or 2021.
Employees were retained or kept on the payroll

In addition to being extended for the rest of the 2021 year, the ERC has also been expanded to cover certain other small businesses for the last two quarters of 2021, for those who opened after February 15, 2020. These types of eligible businesses may claim up to $50 000 per quarter, for each quarter, if their gross annual receipts is less than $1 million. These businesses do not need to have been shut down or have experienced revenue declines.

Which Wages Qualify?

In 2020, for businesses with, on average, less than 100 full time employees in 2019, the credit would have been based on all wages paid to employees, even if they did not work. For more than 100 full time employees, the credit was applied to wages paid to employees who did not work only.

In 2021, a similar concept was taken, except using 500 full time employees on average as opposed to 100.

For more information on changes for the last 2 quarters of 2021, you can visit this page on the Internal Revenue Service’s website.